Tariffs Reduce Not Only A Country’s Consumption, but Also It’s Production
In today’s Financial Times is a letter by me correcting some errors committed by Michael Pettis about trade. (I don’t know why the editors put quotation marks around “on net”; I remove these in the version that appears below.)
Attempting to demonstrate that tariffs can promote economic growth, Michael Pettis makes an elementary error (“Tariffs are a misunderstood economic tool”, Markets Insight, December 10). Specifically, he writes that tariffs “‘work’ by transferring income from one part of the economy to another — from net importers to net exporters, in this case. They do this by raising the price of imported goods, which in turn raises the profits of domestic producers of those goods . . . [Tariffs] are both a tax on consumption and a subsidy to production.”
Pettis ignores the Lerner symmetry theorem, which shows that changes in imports change exports in the same direction. Protective tariffs, therefore, do not transfer income from net importers to net exporters. Instead, tariffs transfer income to protected industries by stripping income away from consumers and unprotected industries. And while tariffs are indeed a tax on consumption, they are a subsidy only to protected industries. Because tariffs reduce the economy’s overall productive efficiency, they are, on net, a tax also on production.
Donald J Boudreaux
Professor of Economics; Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center, George Mason University, Fairfax, VA, US
The post Tariffs Reduce Not Only A Country’s Consumption, but Also It’s Production appeared first on Cafe Hayek.
